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Death knell for partnering as clients seek to cut costs

Contractors and consultants have been warned that the days of cosy partnering arrangements are numbered, as major clients look to cut costs.

Major clients in the rail, water and aviation industries are gearing up to scrap long-term framework deals in a bid to slash costs.

Last week Network Rail told suppliers that it had to make fundamental changes in its relationships to stave off a £4bn overspend.

And water companies, fearful of a tough deal on investment spending from Ofwat in today’s draft price determination are also expected to make sweeping changes to dealings with their supply chains.

Airport operator BAA announced in May that it planned to tear up its existing framework deals and revert to traditional competitive tender for almost all of its major projects.

A new approach

BAA’s framework deals overhaul is being driven by new capital programmes director Steve Morgan. He wants all work over £25M to be competitively tendered.

“I am not throwing out [framework procurement] but I am approaching it in a very different way. Competition is the best way for me to demonstrate value for money to the regulators,” he said.

“Competition is the best way for me to demonstrate value for money.”

Steve Morgan, BAA

Network Rail has yet to set out its plans to shake up procurement, but chief executive Iain Coucher has told suppliers that the company’s approach must change if it is to survive.

“If we continue to spend at the current rate, we will overspend by over £4bn, and we will not let that happen,” he said.

“It would bankrupt Network Rail and put the industry right back to 2001. We would lose the massive gains we as an entire industry have made.”

Coucher wants to develop “professional and mutually beneficial relationships with the supply chain” but said that this commitment had to be matched by the supply chain.

Efficiencies in the supply chain

Water companies are also expected to get tougher with their supply chains following today’s price settlement for 2010 to 2015.

“If partnering has worked then how are there still efficiencies to be found in the capital programme?” asked cost consultant EC Harris partner Terry Povall.

“There are still a lot of efficiencies to make and the key area is the supply chain,” he said. Povall warned that consultants would be hit by the need to make efficiencies.

“Consultants will be under pressure,” he said. “One of the downsides of partnering is the up front cost, which is too high. A lot of people say it is better to take the costs up front than at the end of a job in claims. But I think it’s just a bit too much cost up front.

“And when you spend more time planning and designing rather than building something that doesn’t seem right.”

Readers' comments (3)

  • John Mather

    This appears to say more about procurement than it does about partnering. It would be a great pity if the benefits of partnering were to be lost in order to reduce the upfront costs of establishing frameworks. Perhaps we need to recognise the benefits as well as the costs of frameworks and, at the same time, perhaps we need to make them work more efficiently. Competition generally drives down costs but the goal here should be affordable best value, not least up-front cost. Frameworks offer an opportunity to obtain benefits of scale, to build and maintain efficient collaborative relationships and to secure win-win solutions. I see nothing wrong with mutual objectives, the timely resolution of differences and continual improvement.

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  • kleboe

    Increased competition may indeed drive down costs, but I would be wary of eroding the value of the supply chain too much. In the recruitment industry the same service is now much cheaper but ultimately the fierce competition has reduced the number of suppliers in the market. Some may see this as a positive thing, but ultimately the industry as a whole will suffer when there is a smaller pool of talent to pick their most valuable hires from. The consultancies are taking a short term view of a long term problem. More efficient partnerships would be my preferred solution for the longer term.

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  • When “Clients” look to cut costs they need to appreciate that “Cost” is made up of a number of core elements, thus any strategy to reduce costs needs to be multi headed, to avoid the traditional “Claims” kickback. Overhead, profit, design, construction resources, and risk, combine to make up cost and all should all be dealt with differently given their different drivers. Effective cost reduction does not mean “cut margin” alone, but the tackling each of the constituent elements of cost in a systematic and managed way, which is best achieved in a “Partnering” environment.

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